Fixed Income Test 2 (Answerd) Verified Solution

Fixed Income Test 2 (Answerd) Verified Solution Two factors account for prominence of US Treasuries 1) Volume 2) Liquidity Department of Treasury = largest global single issuer of debt. Most active/liquid market in the world. All Treausury securities are noncallable. Thus, investors are not subject to call risk Marketable Treasury secs fixed-principal securities or inflation-indexed securities Treasury Bills - issued at discount - no coupon - one year or less - return to the investor = the difference between the maturity value and purchase price Treasury notes - pay coupons - 1 to 10 years Treasury bonds - pay coupons - Greater than 10 years Fixed-Rate vs. Floating-Rate Fixed-Rate: pays interest semiannually Floating-Rate: makes quarterly payments TIPS Treasury Inflation Protection Securities - both the coupon payment and maturity are adjusted for inflation semiannually (inflation-adjusted principal) Treasury Auction Process - noncompetitive bids - lazy entity willing to purchase the sec at the yield determined by the auction process - $ bid amount reserved at beginning Treasury Auction Process - competitive bid - bidder specifies the quantity and yield sought stop-out yield ("high yield")